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Elevator Pitch
My investment rating for Cheniere Energy’s (NYSE:LNG) share is a Buy. I am of the view that there are a number of catalysts that could drive the company’s stock price up in the near future.
The first catalyst is the company’s fiscal 2023 EBITDA guidance released in the first quarter of next year comes in above what the analysts are forecasting. The second catalyst is that Cheniere Energy reduces its financial leverage in a shorter-than-expected period of time, and the company’s improved financial profile justifies a valuation re-rating. The stock’s third catalyst is that a larger-than-expected amount of excess cash flow is distributed to shareholders via share repurchases and dividends.
The multiple catalysts mentioned above support my Buy rating for Cheniere Energy.
Recent Price Performance And Changes To Consensus Numbers
Cheniere Energy is the “largest producer of LNG (Liquefied Natural Gas) in the United States” and the “second largest” in the world, according to the company’s disclosures in its May 2022 corporate presentation.
The past three weeks have been a tough period for the US equity market, with the S&P 500 dropping by –10.5%. But LNG’s stock price actually went up by +4.1% during this same period.
Separately, analysts have largely been busy slashing their financial forecasts for listed companies under their coverage in view of economic weakness. However, Cheniere Energy is a clear outlier as the company’s consensus earnings estimates were recently revised upwards in a significant manner.
In the last one month, the Wall Street analysts raised their consensus Q3 2022 and Q4 2022 bottom line projections for Cheniere Energy by +30.1% and +35.4%, respectively. Similarly, the sell-side’s consensus earnings forecasts for LNG in fiscal 2022 and fiscal 2023 increased by +43.5% and +19.9%, respectively in the past month.
Both the company’s recent share price outperformance and the positive change in the market’s expectations about its future bottom line growth were driven by Cheniere Energy’s major announcement made in the middle of last month. I will discuss about LNG’s key September 2022 announcement in detail in the rest of this article.
Updated Fiscal 2022 Management Guidance
On September 12, 2022, Cheniere Energy published a media release disclosing updates and changes relating to the company’s guidance and capital allocation plans. I will focus on LNG’s updated guidance in this section, and turn my attention to its capital allocation in the subsequent section.
LNG increased the company’s FY 2022 EBITDA guidance from $9.8-$10.3 billion previously to $11.0-$11.5 billion now. In other words, the mid-point of Cheniere Energy’s full-year EBITDA has been raised by +11.9% from $10.05 billion to $11.25 billion. It is worthy of note that Cheniere Energy has lifted its FY 2022 EBITDA guidance four times (including this latest revision) this year, and LNG’s initial EBITDA guidance issued in November 2021 was substantially lower in the $5.8-$6.3 billion range. Cheniere Energy’s distributable cash flow or DCF guidance for the current fiscal year was also bumped up from $6.9-$7.4 billion earlier to $8.1-$8.6 billion currently.
At its September 12, 2022, investor call, Cheniere Energy noted that a larger-than-expected proportion of cargoes being redirected to Europe (rather than Asia which has a relatively longer voyage time) and higher-than-expected LNG margins were the main drivers of the increase in 2022 EBITDA and DCF guidance.
Cheniere Energy will offer its management guidance for fiscal 2023 in the first quarter of next year. This could be the next re-rating catalyst for LNG’s shares. The company has already indicated at its investor briefing on September 12, 2022, that it is “definitely going to be able to have a good shot at beating the run rate guidance again next year.” This implies that LNG’s management has confidence in the company’s ability to generate better-than-expected EBITDA in the coming year.
New Capital Allocation Plan Calls For Further Deleveraging And Increased Capital Return
Cheniere Energy made better-than-expected progress with its prior capital allocation plan. As such, LNG had to come up with a new capital allocation plans to replace the existing one.
Earlier, LNG had a $1 billion share buyback authorization that was valid for three years; the company ended up spending more than $600 million on share repurchases in a single year. Separately, Cheniere Energy managed to pay down $4 billion worth of debt two years earlier than planned, as compared to its initial goal of reducing its debt by $1 billion every year over a four-year period.
Under the new capital allocation plan, Cheniere Energy will deleverage faster and return a much bigger chunk of excess capital to the company’s shareholders.
Cheniere Energy’s updated long-term leverage or debt-to-EBITDA target is now 4 times, instead of 5 times as per the company’s previous target. LNG also expanded its share buyback program by an additional $4 billion, which works out to almost 10% of its current market capitalization. Moreover, the company is increasing its annualized dividend by +20% to $1.58, and it has guided for a +10% (up from +5% as per earlier plan) dividend CAGR between now and the middle of this decade.
The “new Cheniere Energy” that has a lower financial risk profile (due to a faster pace of deleveraging) and is actively returning more excess capital (larger buyback authorization and dividend hike) should witness a positive re-rating of its valuations and share price going forward.
Concluding Thoughts
I assign a Buy rating to Cheniere Energy. As long as Cheniere Energy continues to deliver better-than-expected financial performance and executes well on its new capital allocation plan, the company’s share price should go up further.
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